Essay on Strategic Audit

Submitted By Victor-Amaya
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Pages: 7
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Florida International University
College of Business Administration
Chapman Graduate School of Business
MAN6726 – Strategic Management

Executive Summary
Strategic Audit – LAN Airlines

LAN Airlines is one the largest airlines in Latin America, headquartered in Santiago, Chile. It provides flights to Latin America, the United States, Canada, the Caribbean, and Europe. It is a member of Oneworld, the world’s leading alliance that brings together the ten largest and most prestigious airlines to provide world-class service and value. LAN Airlines started with the creation of “Linea Aerea Nacional de Chile” in 1929, a government-owned enterprise. In 1946, the company started international operations with flights to Buenos Aires, Argentina; and later, it started to provide services to the U.S and Europe. A few years later, LAN privatized its company and its major shareholders obtained 98.7% of the company’s shares. The company currently is composed by LAN Airlines and LAN Express (Chile), LAN Peru, LAN Ecuador, LAN Argentina, and LAN Cargo and its affiliates. (LAN Airlines, 2010).

LAN’s strategy can be defined using Porter’s Generic Strategies as a “Focus Strategy”, as it combines the two types of competitive advantage: Cost Leadership and Differentiation and Product Differentiation (See Exhibit 1). The company focuses on achieving cost leadership by investing on an efficient fleet of efficient airplanes, and by providing customers with e-ticketing services, among other initiatives. In addition, the company follows a differentiation strategy, with the introduction of the Business Premium class, and the Economy Premium; offering customers innovative services. However, the company is concentrating mainly on routes in Latin America (See Exhibit 2). At the same time, the company also takes advantage of a Related Diversification strategy, by diversifying into similar industries, in this case: Passenger Domestic, Passenger International and Cargo operations. By doing this, LAN benefits from the ability to share resources and capabilities between businesses and therefore higher profits. Consistent with its Product Differentiation strategy, the company has engaged in the implementation of innovative in-flight entertainment packages offering new features that exceed customer expectations and excellent service. On relation to the Cost Leadership strategy, LAN has started the installation of winglets on their planes in order to minimize fuel consumption and increase punctuality and reliability. And finally, LAN continues to focus in the Latin American sector by expanding routes to Ecuador, starting operations between Miami and Central America for LAN Cargo, and by introducing a new LAN Cargo affiliate in Colombia (LAN Airlines, 2010).

LAN’s operational performance has been improving year to year. The company has been able to increase their market share through the last years, in both passenger and cargo business units. This increase in market share is due to their routes expansion and the better use of aircraft capacity. The current passenger load factor for the company is 77%, which is 1% higher than the industry’s, and the overall load factor (passengers and cargo) is 6% over the break-even point. This shows a good operational performance from the company (See Exhibit 3).

Regarding the Airline Industry, a quick assessment can be done using Porter’s five forces model (See Exhibit 4). Buyer power was found to be high due to technological innovation, lack of differentiation and low switching costs. Also Supplier Power is high; this is associated to potential strikes from labor, limited suppliers, as well as long waiting periods for aircraft. Industry Rivalry is also high, due to intense price competition (since the de-regulation of the industry), high-fixed costs and low margins. When it comes to traveling, air has been the fastest and most convenient way. At the regional level, traveling by land (car, bus or
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